Continuing this week’s theme of the ‘big issues’ facing contract and commercial management, Martin Loenstrup made a comment that included a number of questions he rightly suggests must be answered.
So in today’s blog, I will provide my thoughts on those questions.
– will compliance play a role in justifying Contract Management in 2015? I think compliance is always a key part of the role of any robust risk management regime. However, the real issue in my mind is the extent to which contracts / commercial professionals are simply monitoring compliance, versus evaluating the consequences of non-compliance and making or assisting in judgments over this. Some professionals see their role as being about the management of deviations or exceptions from the standard; some even see that role at a strategic level, as the champions of the evolving policies on which compliance standards are based. This is a very wide spectrum of difference, ranging from the high value strategic role in managing change to a low value administrative role in preventing exceptions.
– is the collaborative approach just a highflying ideology or just still ahead of time? It is happening, whether or not contracts staff care to acknowledge it. Again, do we simply dismiss this trend and say we have heard it all before, or do we take the time to understand it and help the business appreciate how it can occur? We go back to my earlier comment – are we strategic enablers, or administrators?
– is contract/commercial management yet another definition of similar roles depending on industry and geography? These terms are unfortunately confused because they do vary significantly in their role and meaning depending on geography and industry, even by company. But the scale of those differences tends to be exaggerated, because it often serves people’s interests to position themselves as ‘different’. However, from the perspective of professional status, greater consistency is critical and that has been – and remains – core to IACCM’s purpose and achievements. We perhaps confuse core methods and techniques and code of practice (which are core to any profession) with the issue of specialist knowledge (which varies by job role). However, right now, we are observing a growing divide between the typical commercial role (broader, more about business judgment) and contract management role (more transactional, oversight of specific deals).
– should Contract Management be located as a separate department in the organization or is this actually a limiting factor? The answer depends very much on purpose. Clearly, if the role is administrative, it can be anywhere. If the focus is on adding value, the extent of that value will be constrained by organizational reporting line. Our research points quite clearly to the impact of reporting line on the quality and value of output.
– is the new trend of Contract Management certifications worth the money or do we need a global standard to avoid individual and varying quality? We have a global standard – that is what IACCM brought to the world. In this age of globalization, most professions are trying to move towards global standards. Contract and commercial management was possibly the first ‘profession’ to have such a standard. It is therefore ironic that we are seeing emergence of ‘local’ variants which threaten to undermine the status and standing of contracts and commercial practitioners by once again raising questions over what they do, what they know, whether they have meaningful qualifications. Many times, the providers of these certificates are opportunistic,, for-profit organizations, riding on the back of the work that has been done to raise the profile of this field of practice. However, others have a valuable contribution to make in bringing new ideas, new methods and local availability of training. IACCM’s approach is to collaborate with such organizations, to maintain a global certification standard but to support the availability of local delivery.
What are the topics exercising the minds of contract and commercial professionals? What issues are enlivening their conversations?
Of course, to many non-practitioners, it is probably hard to associate the subject of contracts with any concept of ‘being enlivened’. But in reality, there are many active and important debates going on, reflecting the many tensions and the significant growth in importance of contract and commercial management.
Yesterday I started a series of blogs aiming to highlight and agree ‘what are the top issues we need to address?’ My initial list has already drawn some great comments and material for further options. Today, however, I want to offer another pre-prepared list of the ‘top ten issues for contract and commercial management. Please keep your ideas and comments coming – to make real progress, we first need a debate that establishes the greatest priorities. Our community must build consensus on the things that matter and solutions to them. That is what being a professional is all about!
10 TOP ISSUES FOR CONTRACT & COMMERCIAL MANAGEMENT
– should the law department ‘own’ contract management?
– does contract management software serve any useful purpose?
– what’s the difference between a contract manager and a commercial manager?
– can suppliers ever be trusted?
– can Procurement ever behave reasonably?
– is it possible to show an ROI from contract management?
– the only way to get compliance / better business decisions is to force ‘the business’ to get approvals / force them to involve us earlier
– the allocation of risk is the most important thing in contracting so we will always need to spend our time on that issue
– senior management doesn’t understand what we do (implicit in this: “and that is their fault”)
– “it’s impossible to define the role of contract / commercial management – we do so many different things”
Given their growing importance, it isn’t surprising that more and more people are showing an interest – even claiming ownership – of these fields of business activity. Suddenly they are buzz terms in many organizations and we discover all sorts of people who were apparently experts in this field all along!
This naturally causes some contention with the people who were actually performing contract and commercial tasks. But the truth is that these are broad disciplines and they touch the business in many areas. So contention is inevitable – and should be welcomed. It offers the opportunity to re-define contract and commercial management and how they contribute to organizational performance.
What are the areas of contention or critical interest? That is the key question – and it is something I have been asking a number of leaders in this field. So this week, my blogs are going to focus on this topic – and here is the first list that was contributed:
TOP ISSUES AND DEBATES FOR CONTRACT AND COMMERCIAL MANAGEMENT (List #1)
- The importance of price vis-à-vis Total Cost of Ownership and risk in a contracting decision
- The organizational placement of the Contract / Commercial Management role
- The value of adapting to global standard templates versus using one’s own templates
- Whether CCM needs to be primarily proactive or reactive; tactical or strategic
- Should best practices be pursued top-down or bottom-up?
- Is Big Data a realistic and useful tool or just another fad?
- How can organizations measure their ROI from the CCM investment?
- Is Relational Contracting a viable approach to contract negotiation?
- Are stakeholders a help or hindrance?
- What is Commercial Excellence?
So please weigh in. Do you think these issues are important – and if so, how important? What would you add to the list? Thoughts and opinions on this topic will fuel debate and research for IACCM’s agenda in the year ahead.
As businesses struggle with managing their diverse and volatile trading relationships, is increased use of relational contracting almost inevitable?
Extensive data points to the fact that businesses are becoming more inter-dependent. On average, external spend as a percentage of revenue is growing. The extent – and volatility – of partnering and teaming is also increasing, as is the diversity of sales channels and routes to market.
All of this leads to growing complexity and a shifting risk profile for business management. Cloud computing is an excellent example of this. In the past, the enterprise bought or leased hardware and then developed or licensed software. The IT department was large and relatively autonomous. Cloud services fundamentally altered this dynamic. Hardware needs are slashed; licensing transforms to use-based charging; and ease of acquisition means that just about anyone in the business can start using external programs or apps.
The challenge for the CIO is very different. They need to develop an overall strategy and plan for technology services and they need to institute some form of control over internal policies and purchases. In addition to this, they become far more dependent on managing external relationships and integrating those relationships to ensure coherent service delivery.
That is where a big player like IBM tries to step into the scene. If they can “create an ecosystem of technology partners”, they offer to simplify the world for the CIO – and of course establish IBM as the partner of choice. Commenting on this strategy, Colin Cram wonders how IBM will manage this ecosystem and asks whether it may lead to the creation of a Relationship Management Office.
Certainly Colin is right to highlight the key challenge that relationship management represents to businesses as their inter-dependency grows. While corporations like IBM have some outstanding relationship managers (and accompanying tools and processes), they operate for a selected group of customers and ‘relational competence’ is an evolving discipline. IBM’s strategy with regard to ‘ecosystem development’ is not new. I recall in the 1990s a similar approach to the application development market. At that time, it was Hewlett-Packard (and the now disappeared DEC) that managed to ‘surround’ IBM through its strategy of partnering with application developers. IBM raced to catch up with a diverse range of agent and remarketer programs targeting especially the application development community.
I recall the excitement that many small providers felt when they signed a partnering agreement with one of these technology giants. They believed their break-through moment had come. The problem was, for around 90%, nothing ever happened. There was no effective way to integrate or promote their software to a global Salesforce. The central program owners at IBM or at HP had few levers to create awareness and lacked resources to offer any meaningful ‘relationship management’.
Has anything changed today? Certainly the networked technology now available will increase the chances of visibility and success. But I somehow doubt that IBM will be investing a whole lot of money in developing a ‘relationship management office’. I also suspect that they are providing this approach as a customer convenience and that they are careful to limit their liability for the quality or results achieved from these third party offerings.
While sharing Colin’s enthusiasm for relational contracting, I rather doubt that IBM’s approach to selling cloud services represents the break-through moment.
Did you know that monitoring compliance remains a key focus for contract management groups and the most common area for reporting? Would you have guessed that only about 8% of organizations typically succeed in always imposing their standard terms or that, for the average company, around one third of contracts are completed without any negotiated amendment?
These are just a few of the many statistics emerging from the 2015 IACCM Benchmarking Study, which looks at a wide range of performance and management data related to contract and commercial management. At a time of growing executive interest in contract and commercial capabilities, having benchmark data is becoming increasingly important.
How many contract managers does it take to write a contract?
Part of the challenge is around efficiency. For example, At one extreme, a contract manager may be overseeing as many as 250 separate contracts, while at the other there may be an entire team dedicated to a single mega-deal. Benchmark data gives answers across this spectrum. For example, it tells us that the average bid and negotiation cycle time for low complexity agreements is under 6 weeks – though for bottom quartile companies this stretches to over 8 weeks. We also gain insight to other factors, such as the fact that ‘international’ contracts typically take 25% longer to close than purely domestic agreements.
Is my contract management organization delivering value?
In leading-edge organizations, executives are becoming far more interested in contract and commercial effectiveness. That means they want to know whether their contracts are delivering the right outcomes and optimizing financial results, as well as protecting against risks. Here, benchmark measures are quite varied, but include comparisons of how time is spent, the reports provided to management and the skills of staff. Our data tells us that the quality of market research is generally low, with less than 20% having significant insight to competitive terms and contract structure. Many organizations still deploy substantial resources on low complexity contracts, whereas in high performers more than 70% of contract management time is spent on high complexity deals. Another benchmark is training and skills development, where there are dramatic differences in investment, with staff in bottom quartile organizations receiving an average of less than 2 days training a year.
Some useful benchmarks relate more to market trends. For example, we often hear that the average duration of contracts is reducing, yet according to the survey that is not the experience of most organizations. Just 24% report this trend, against 31% who say the term of their contracts is increasing. Another confirmed trend is the steady shift towards web-based and distance learning, which is now twice as likely to be used as classroom programs. However, even though we now have access to on-demand programs, the overwhelming favorite for training remains on the job experience and learning from colleagues.
Where can I get this benchmark data?
The IACCM benchmark studies currently in process are detailed below and remain open for input. Click on the link to access the survey. Participants will receive an early copy of results:
- Performance Measurements: This survey looks at headcount, contract complexity, measurements used to gauge both individual and functional performance and a range of efficiency indicators (e.g. cycle times, number of contracts per professional etc.)
- Primary Areas of Activity: This survey looks at scope of role, where responsibilities are performed, time allocated to different activities and use of outsourced or offshore services.
- Value Proposition: The survey you are about to complete focuses on the value that you deliver to the business. It looks at reporting line, objectives, challenges you are facing, the use of automation and skills
Society, ever less tolerant of ‘bad behavior’, seems to welcome regulation. Perhaps this is an inevitable consequence of the breakdown in trust, itself caused by the erosion of traditional loyalties and communities. So while regulation has influenced many aspects of human tolerance in a positive way, general levels of polite behavior often appear to have fallen.
What exactly are the standards when it comes to a 5-year-old’s birthday party? That is the question being put to the test in Cornwall, England, where no-showing for a party has resulted in an invoice and threats of court action to recover resulting costs. The offending child (or parents?) accepted the invitation and then had second thoughts. Their host incurred fees of approximately $25 which could have been avoided if there had been a cancellation.
Justified annoyance? Probably. Appropriate reaction? I suspect not. And indeed, not only is this attempt at recovery most likely doomed to failure (for background and expert opinion, click here), but the host parents would seem not to have undertaken effective stakeholder analysis when launching their attempted recovery. For example, what will other parents think? What will other children at their son’s school say? There is every chance that next year, the boy will celebrate his birthday alone. Play dates? Forget about those – they are too risky.
In the end, every smart individual (and organization) must weigh their desire for recovery (or revenge) against the wider impacts on their brand or reputation. That is why litigation is so rare. Most times, it is far smarter to simply write off the losses and forget about them, or to seek compensation through reasoned discussion.
Fact-based decision making is gaining the attention of business leaders worldwide. That is because they recognize it has critical importance to survival in today’s volatile, competitive and complex markets.
Many of today’s business decisions are based on opinions or flawed data. For example, there are people who believe all suppliers are intrinsically dishonest, or that all customers are unreasonable. There are those who believe that good performance is best achieved through consideration and encouragement, while others think that the threat of punishment is more effective.
Most of us have plenty of opinions and we find comfort in them. Sometimes these are based on facts. Often they are influenced by specific experiences or education, which may or may not be indicative of norms or reality.
When we look at how contracts are drafted, or how business relationships are conducted, we rapidly see evidence of very different opinions. Indeed, we need only to conduct an internal review and approval process to discover wide variations in the underlying attitudes of different functions or individuals. When challenged, we may often hear about specific incidents, or about ‘someone who told me’, but it is rare to find positions that are well supported by factual data. For example, what is the actual impact if commercial staff are involved late or whether or not a ‘professional’ contract manager or lawyer oversees performance? What is the actual impact of onerous liability clauses or liquidated damages? What is the actual effect of extended payment terms or more generous rights of return or of mandatory arbitration rather than litigation? And how do these answers vary according to the type of relationship, or the culture within which events are occurring?
Ask around and you will receive a multitude of different opinions. I challenge you to unearth many facts.
Effective management seeks to harmonize these viewpoints. It recognizes that diversity of opinion can be a creative force, but unless there is control and balance it will rapidly lead to destructive contention. We see plenty of evidence in the world today where strongly held beliefs, often lacking a factual basis, become a source of massive destruction.
Developing harmony in the way we construct and manage our trading relationships is surely the key to improved performance, but it is unlikely to be achieved while so many decisions and behaviors are based on individual opinions. That is why organizations are becoming so interested in data that can lead to fact-based decision-making. In a recent article, The Economist pointed to this development in the world of economics, where the long-ignored field of microeconomics is now surpassing macroeconomics in terms of interest and influence. That is because we live in a data-rich world with technologies that can now undertake meaningful analysis. The result? A mass of hitherto unknown facts, which increasingly drive business strategies and offerings. Take for example the recent collapse in the oil price. The ‘macro’ world should have been forecasting this – but it wasn’t. So the ‘micro’ world now kicks in, helping management to decide what steps to take to address this situation.
The world of contracts has remained largely immune to the influence of data analytics. Even though there are millions of contracts available, a lack of clear structure and the diversity of wording has made data extraction difficult. But perhaps more important, we have a professional community that is resistant to change and which continues to place value on individual opinions, collective wisdom and the interpretation of precedent. That is perhaps the major reason why we now see a new field of ‘Commercial Excellence’ emerging. Organizations are determined to extract more value from their market relationships, especially on the supply-side (though it is my opinion(!) that this won’t take long to flow through into procurement as well). To achieve this, they are focusing on new approaches to market segmentation, more adaptive market offerings, differentiated sources of value through commercial terms – and to get there, they need much more integrated data collection, tools and systems to perform analysis and skilled staff to oversee these activities and apply business judgment. Right now, those being recruited into these posts are not from traditional ‘commercial’ functions.
Where does this leave today’s contracts and commercial staff, including lawyers? Perhaps rather like the macro-economists, we will find ourselves relegated to a subordinate role, still muttering our opinions even when no one is listening. Or, of course, we can ensure a very different future by grasping the need for change and becoming the owners and purveyors of facts.